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Will CVS Health (CVS) Beat Estimates this Earnings Season?

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We expect pharmacy innovation company CVS Health Corporation (CVS - Free Report) to beat expectations when it reports third-quarter 2016 results on Nov 8.

Last quarter, CVS Health’s earnings exceeded the Zacks Consensus Estimate by 1.54%. The company has beaten earnings in two of the preceding four quarters, with a positive average surprise of 0.62%.  

Why a Likely Positive Surprise?  

Our proven model shows that CVS Health is likely to beat earnings because it has the right combination of two key ingredients. 

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is at +0.64%. This is a meaningful and leading indicator of a likely positive earnings surprise. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.

Zacks Rank: CVS Health currently carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings. The sell-rated stocks (#4 or #5) should never be considered going into an earnings announcement. 

The combination of CVS Health’s Zacks Rank #3 and ESP of +0.64% makes us confident of an earnings beat on Nov 8. 

CVS HEALTH CORP Price and EPS Surprise


What is Driving the Better-Than-Expected Earnings?

CVS Health is optimistic about sustaining its solid year-over-year earnings trend in the remainder of 2016 driven by the gains to be realized from the Pharmacy Services segment. However, according to the company, several timing factors will affect the cadence of profit delivery throughout this year.

These factors include the introduction and timing of break-open in generics, the timing of profitability in the Medicare Part D business, the timing of the benefits from the company’s strategies to drive growth in the front end, and the timing of share repurchases along with certain tax benefits among others.

However, we are encouraged to note that earlier management stated these timing factors will lead to back-half weighted profit growth in 2016. Consequently, the third quarter may witness a ramp up in growth compared to the previous two quarters.

On the bright side, turning to the 2017 selling season, despite tough pricing competition, CVS Health is currently benefiting well, displaying high levels of service and execution, competitive pricing along with a unique integrated model that allows the company to provide diverse products and services generating savings, better health outcomes and convenience. CVS Health last declared that it had completed over 75% of its client renewals already.

We take note of the recently completed Omnicare and Target Pharmacy acquisitions that are currently undergoing the integration process. According to CVS Health, both the acquisitions are strategic fits and it anticipates gaining from the multiple opportunities for driving enterprise value from Omnicare and Target in the near and long term.

CVS Health had earlier provided its third-quarter 2016 adjusted EPS projection. The company expected adjusted EPS in the range of $1.55−$1.58. The current Zacks Consensus Estimate of $1.57 falls within but near to the upper end of the guided range.

Stocks to Consider

Here are some companies you may want to consider as our model shows these have the right combination of elements to post an earnings beat this quarter:  

AECOM (ACM - Free Report) , with an Earnings ESP of +4.11% and a Zacks Rank #3.

AerCap Holdings N.V. (AER - Free Report) , with an Earnings ESP of +2.82% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Comstock Resources Inc. (CRK - Free Report) , with an Earnings ESP of +0.93% and a Zacks Rank #2.

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